Over 5,000 listed cryptocurrencies are available for investment, with the prices ranging from a few cents and up to Bitcoin at a top price of $68k in November 2021.
Cryptocurrencies are volatile, so why do people invest in cryptos? Are there disadvantages to investing in cryptocurrencies? If so, what are they? What are the pros and cons of investing in cryptocurrencies?
Many prominent investors now have cryptocurrencies as part of their portfolios. For instance, Elon Musk (Tesla CEO) holds over $29 million Bitcoin. So there must be benefits of investing in cryptocurrencies.
In real terms, cryptocurrencies are unchartered territory. Because of the unpredictability and lack of history, the potential for cryptocurrency investing is subjective.
But, with any investment, there are no guarantees of future gains. So, in a way, crypto investing is as likely to bring good returns as any other form of investment.
If you are considering investing in cryptocurrencies, your investment plan may need to be long-term. It's no different from investing in stocks and shares, as the recommended term is five to ten years for an investment plan.
But why invest in cryptos?
Look at the meteoric rise of Bitcoin. In 2009, it started at less than a dollar but rose to $68k in November 2021. Yet, when it came to the market, very few investors took Bitcoin seriously.
In 2017, when the price of Bitcoin rose to almost $20k, some early adopters became millionaires.
If you had purchased $100 of Bitcoin in 2009, you could have sold it at its ATH for more than $6,800,000, which is a lovely retirement amount by any standards.
With the thousands of cryptocurrencies on the market today, there's potential that one of these cryptos could make you wealthy, but it's speculative, of course.
All successful financial advisors suggest a diverse portfolio, and crypto is no different. Investment in a range of cryptocurrencies increases the chances of potential gains.
Investing in cryptocurrencies can be risky. In this article, we will look at the benefits of investing in cryptocurrencies. You'll learn how to diversify your crypto portfolio and how to minimise the risks of investing in cryptocurrencies.
In conclusion, you will know what to look for from your cryptocurrency investments. You will also learn where and when to buy or sell cryptocurrencies.
- What Are the Benefits of Investing in Cryptocurrencies?
- What Are the Disadvantages of Investing in Cryptocurrencies?
- What Are the Risks of Investing in Cryptocurrencies?
- How Do I Diversify My Crypto Portfolio?
- Top Crypto Diversification Strategies
- Recap of Key Benefits of Investing in Cryptocurrencies
What Are The Benefits Of Investing In Cryptocurrencies?
In today's investment markets, it's a challenge to know where to put your cash. Years ago, the typical small investor looked to save with ISAs and cash accounts. Because there was a known fixed return, these were considered safe investments.
These days (2021), cash savings returns are so small as to be negligible. Moreover, the returns have to exceed inflation, so it's almost impossible to make significant profits.
Many people turn to stocks and shares, believing they can gain stable returns. But, unless you know what you are doing, novice investors usually get burned and lose their money. Plus, to make a beneficial return, there's a requirement for a decent amount of capital, which needs to be invested in stocks for five to ten years to generate worthwhile gains.
The benefits of investing in cryptocurrencies are that you can start small.
You can buy emerging cryptocurrencies that may or may not bring long-term returns.
Some of the cryptos are low-priced, so that many novice investors may buy cryptos as a bit of a punt. They could be right. Their crypto investment may pay off in the long run.
With so much interest in crypto investing, what are the key benefits of investing in cryptocurrencies?
There are six potential benefits of investing in cryptocurrencies:
✅ Fantastic returns – despite that cryptos haven't been around long, they can be more profitable than other investments. On average, stocks generate a stable 10% yearly return. With cryptos, a 10% gain can happen in a day. Equally, for example, Bitcoin dropped 10% overnight after a tweet from Elon Musk
✅ Independent alternative – the stock market can crash at any time depending on world events. Cryptos are volatile, but they are not centralised, so they are not affected by market conditions.
Many crypto industry experts are predicting the rise of cryptos over the next five to seven years. Though there are no guarantees, it certainly seems like cryptos are here to stay.
✅ Your money is yours – if your money is in a traditional bank, it's at risk. The bank could go bankrupt. Your access could suddenly be limited, or the bank could close your account.
The beauty of cryptocurrency is that no one else has control of your crypto holdings. Your money is yours and stays that way. If we do move deeper towards a decentralised economy, you are in a great position to take advantage of that.
✅ High liquidity – successful investors always look for liquidity and volume, and cryptocurrencies certainly have that. As a result, it is easy to buy and sell cryptocurrencies.
✅ Simplicity – nobody wants complicated, time-consuming investments with contracts and time limitations, etc. And the man on the street wants access to simple assets without needing significant capital.
It's easy to register for an account with a crypto exchange, provide your details, get a wallet to deposit your funds, and buy your cryptocurrencies.
Effortless investing is a positive benefit of cryptocurrencies
✅ No experience is needed – trading cryptocurrencies is challenging because of the volatility. It's possible to day trade cryptos in two hours or less, but it's a huge learning curve with a 95% failure rate for traders. So investing in cryptocurrencies may be less risky than trading cryptocurrencies
Nevertheless, most crypto forecasters are predicting exponential growth for cryptocurrencies within the next two to five years. To give you an example, Ethereum had a 400% growth in 2021. Likewise, Dogecoin exploded by 2,900% in 2021.
These are crazy percentages. But, if you buy on the right side of growth, the potential for gains from crypto investing is enormous.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
What Are The Disadvantages Of Investing In Cryptocurrencies?
So far, we've looked at the pros of investing in cryptocurrencies, but what are the potential disadvantages of investing in cryptos?
There are a few outspoken critics of cryptocurrencies, and cryptos are sensitive to media coverage. For example, billionaire investor Warren Buffett makes no bones about his opinion of Bitcoin, which he describes as risky and worthless. He denies owning any cryptocurrencies.
Elon Musk recently tweeted his decision to remove Bitcoin payments for Tesla vehicles until the mining process upgrades to reduce the demand for energy resources, which he cited as damaging to the environment. He does, however, hold $29 million of Bitcoin.
These prominent investors regularly make media statements, so you may have to ride the waves created by negative coverage of cryptocurrencies if you are a crypto investor.
The experts once said the earth was flat, but we now know otherwise. Investors entrenched in the stock market may never agree on investing in cryptocurrencies, but that doesn't mean they are right.
However, let's look at possible drawbacks for crypto investing
❌ Scalability – many cryptos started up without considering the potential for scalability. Speed of transaction is a major requirement for businesses and consumers. As yet, many cryptocurrencies don't have the infrastructure to compete with VISA and Mastercard transactions.
However, some crypto companies are on the ball. For example, Ethereum is in the process of upgrading to a sharding process and staking (proof of work protocol – PoS), and a few others are following their lead, such as Cardano.
❌ Security issues – because cryptos use digital technology, they may be subject to cyber-attacks. Already, multiple ICOs have been breached, losing investors hundreds of millions of dollars. But, many crypto companies are now dealing with this, increasing cybersecurity measures far beyond those used in traditional banking
❌ Volatility and lack of inherent value – Warren Buffett characterised the entire crypto ecosystem as a bubble. Digital currencies, by default, have zero physical assets. What are you actually buying? A piece of paper or a code? Crypto companies may overcome this issue, and some are already linking cryptos to energy derivatives and diamonds
❌ Future regulations – Warren Buffet said, "It doesn't make sense. This thing is not regulated. It's not under control. It's not under the supervision [of] any…United States Federal Reserve or any other central bank. I don't believe in this whole thing at all. I think it's going to implode."
Governments dislike the lack of control they have with cryptocurrencies. Unless they find a way of adopting cryptocurrencies, they will likely try to enforce crypto regulations. Some countries have already banned cryptocurrencies.
❌ Changing protocol limitations – when crypto technology is undergoing improvement, there are associated risks. For instance, Ethereum is rolling out ETH 2 upgrade and has enabled proof of stake (PoS) protocol which means you can now stake Ethereum and receive rewards.
However, the completion of the Ethereum upgrade is not until 2023. Until that time, if you stake Ethereum, you cannot access your ETH or withdraw your ETH rewards until the completion of the upgrade. If the upgrade delays, your Etherium is still tied up
Some experienced investors may be against cryptocurrencies. The unfamiliar may be a challenge until it becomes familiar. But cryptocurrencies are likely here to stay. Blockchain technology is developing exponentially, and the benefits of investing in cryptocurrencies far outweigh the disadvantages.
What Are The Risks Of Investing In Cryptocurrencies?
All investments come with risk. Because you are speculating on an outcome that cannot be guaranteed, it's the definition of risk.
For the long-term investor, adding cryptocurrencies to your portfolio is an attractive option.
There are over 5,000 listed cryptocurrencies, and not all will come good. Some will rise, gaining market cap. Others may not make it past ICO. So as an investor, you have to balance up the risks of an unknown quantity with the potential gains.
Only invest what you can afford to lose and allow between one to five years or more to profit from your cryptocurrencies.
While you want to know the benefits of investing in cryptocurrencies, it's crucial to understand the risks:
- You could lose your investment – there are no guarantees with any investment. The future of cryptocurrencies is uncertain but is any investment risk-free? No.
The stock market can crash, as history proves several times, and other financial instruments are high-risk investments. On balance, yes, you could lose your money with crypto investments, but the potential for gains balances out that risk
- Capital Gains tax – cryptos are decentralised, but the IRS defines cryptocurrencies as property rather than currency.
When submitting annual tax returns, crypto holders must report expenses and profits from their crypto holdings. However, there's some confusion about tax implications and reporting depending on where you purchased your cryptocurrencies.
A Report of Foreign Bank and Financial Accounts (FBAR) must be sent to the Treasury Department if you have more than $10,000 of cryptocurrency abroad.
To further complicate issues, the Foreign Account Tax Compliance Act requires some U.S taxpayers to submit a form 8938 to the IRS, declaring overseas accounts.
It's worth checking the financial tax requirements for crypto in your country
There may be other associated risks but no less than for any investment. Because of the decentralised status of cryptocurrencies, there are a few grey areas that governments may try to capitalise on.
How Do I Diversify My Crypto Portfolio?
Ideally, it's best to invest in several financial instruments to spread the risk.
The price of cryptocurrencies tends to follow each other and is influenced by Bitcoin activity. Therefore, if the price of Bitcoin falls, it tends to affect the price of most other cryptos.
To diversify your crypto assets means investing in a wide range of crypto projects.
Some cryptos offer staking options, which means you can earn a passive income from your holdings. In addition, some financial platforms offer cryptocurrency saving accounts, where you can make passive income from your cryptos without liquidating them.
Why should you diversify your crypto portfolio?
The main reason for crypto diversification is to mitigate risk.
The broader your portfolio, the less likely it is to face a catastrophic loss. Another reason is that a diversified crypto portfolio may achieve better performance.
Everyone thinks of Bitcoin as the crypto to buy, but there are so many other, less expensive cryptos that could, one day, turn into the next Bitcoin.
Bitcoin mining runs with proof of work (PoW) protocol, a massive drain on energy resources.
Other cryptos like Ethereum and Cardona are already running on proof of stake (PoS) protocols with more efficient and less costly energy requirements. Emerging cryptos now realise the need for scalability and, as such, present a better opportunity for growth and investment.
Is it possible to diversify in crypto?
The majority of altcoins correlate with Bitcoin, so the assumption is that it's not possible to diversify a crypto portfolio. But, the truth is that many cryptos have different purposes to Bitcoin, and that may lead to price performance differences as the crypto market becomes more established.
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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Top Crypto Diversification Strategies
The consensus is that diversification is the way to maximise the benefits of investing in cryptocurrencies. But, how do you diversify your crypto?
Below are some ideas for how to diversify your cryptocurrency portfolio:
Diversify by Type of Cryptocurrency
There are different types of cryptos available. So make sure your portfolio represents a cross-section of crypto types.
- Transactional tokens – used as a form of currency, such as Bitcoin
- Smart contract tokens – Ethereum, Polkadot, and Binance Chain, use blockchain technology to develop decentralised applications. They run smart contracts on their platform and offer peer-to-peer payments
- Yield-earning tokens – you can earn percentage yields on tokens like ETH and BTC and many more
- Utility tokens - tokens integrated into an existing blockchain protocol and used to access its services. An example is CHSB
- Stablecoins – these are coins pegged to traditional currencies and assets. They can provide less volatility and more stability than the typical crypto tokens. Examples are USDC and PAXGold
Diversify by Industry
Investing in various sectors is a good way to protect yourself against significant losses if one industry takes a hit. Examples of industries with cryptocurrency projects are below:
- Artificial intelligence
- Data and analytics Energy
- Decentralised finance
- Supply chain
You can also invest using regional diversification, investing in cryptocurrency projects from different parts of the world.
The simple explanation for time diversification is varying your investing over different time scales. It's a challenging investment option but popular with some investors.
If you have $25,000 to invest, rather than putting the lot into crypto investment straight away, you can stagger your investments over time.
For instance, you might plan to invest $1000 - $2000 a month in cryptocurrencies seeking the best return.
At the beginning of 2020, Ethereum was below $150. In May 2021, the price peaked at $4,300. Thus, had you purchased 100 ETH in 2020, you could have withdrawn $430,000 in 2021.
Over the year, you could have invested at each price drop and maximised your crypto gains.
Conversely, in July, the price of ETH dropped back to $1,800.
If you had bought the pullbacks, there might have been a few months of worry. But, crypto industry experts predict that Ethereum could rise to $20,000 by 2025.
The issue with all crypto investments is knowing the best price to buy, which is wholly subjective. Had you sunk all $25,000 into Ethereum at a higher price, you'd have missed the chance to buy all the lows.
Read Also: The Psychology of Trading Cryptocurrencies
Recap Of Key Benefits Of Investing In Cryptocurrencies
Is investing in cryptocurrencies a good idea? How much value is there from investing in digital assets?
Crypto industry experts are predicting that the growth of cryptocurrencies could be exponential. Some crypto experts suggest that the price of Bitcoin could reach $500,000 by 2030, and Etherum could be as high as $20,000 by 2025.
Like it or not, the truth is that cryptocurrencies are likely here to stay and equally likely that the growth of cryptocurrencies could be exponential.
The main concern for the longevity of cryptocurrencies is the governmental dislike of decentralised currencies. Government interference could turn the crypto market upside down if cryptocurrencies became regulated. This potential issue is a major concern when investing in cryptocurrencies.
Some prominent investors don't believe in the longevity of cryptos and are prone to making their feelings known to the media. Their statements can have a short-term effect on the price of cryptocurrencies. But, over time, the performance of listed cryptocurrencies will either prove or disprove the beliefs of investors that dislike cryptos.
We looked at the advantages and disadvantages of investing in cryptocurrencies and measured risk against potential. In the main, the benefits of investing in cryptocurrencies outweigh the potential downfalls.
You can invest in cryptocurrencies at the financial level you can afford, and you can choose a range of cryptos to diversify your investments as a way of lowering risk.
Select cryptocurrencies that demonstrate potential for scalability.
You may want to invest in cryptos from the top ten listed cryptocurrencies - research cryptos with different purposes and from a variety of industry sectors.
There are many crypto scam websites online, so always do your research before buying crypto. Buy your cryptocurrencies from an established platform, such as eToro, Binance, or Coinbase.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in cryptocurrencies may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
eToro – The Best Platform To Buy Cryptocurrencies
eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply
What are the Best Cryptos to Add to my Portfolio?
With thousands of cryptocurrencies available, it's tempting to look at the lowest-priced cryptos for investing.
What you buy and how much crypto to buy are dependent on many factors. Of course, all investments are risky but assess your tolerance for risk before buying your cryptocurrencies.
All cryptocurrencies are listed on CoinmarketCap and by market capitalisation. You can click on each crypto listed and read about their purpose, scalability, and innovation.
What are the Top 10 Cryptocurrencies?
The top 10 cryptocurrencies have been relatively stable for a while.
The cryptos that make the top ten are there for a good reason. In the top ten listed cryptocurrencies, prices vary from $0.15 (DOGE) up to $43,000 (BTC), so there's a price level to suit every investor.
Currently, the top 10 cryptocurrencies are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- Binance coin (BNB)
- Cardano (ADA)
- XRP (XRP)
- Dogecoin (DOGE)
- USD coin (USDC)
- Polkadot (DOT)
- Uniswap (UNI)
Some of the above cryptos have received a lot of interest in the last six months. For instance, Dogecoin and Cardano show proof of scalability and technological innovation.
Research each one, and maybe even the top twenty cryptocurrencies, before buying.
Where Can I Buy Cryptocurrencies for Investment?
There are many crypto exchanges online where you can buy, stake, or invest in cryptocurrencies.
- eToro – an established social trading platform that now sells over 120 cryptocurrencies and has its eToro crypto wallet and offers staking options on some cryptos
- Binance – an established crypto exchange
- Coinbase – a well-known, established crypto platform
You need a safe, encrypted wallet to store your cryptocurrencies, so you don't have to keep moving your cryptos around, scattered in various wallets. The above three crypto platforms have secure crypto-wallets.